3 Divorce Issues in Retirement
In most cases, when you get married you don’t plan on getting divorced. But the fact is that divorce does happen, and sometimes it happens to couples who are in or approaching retirement. Divorce later in life creates several new challenges, but it may also give you some potential planning opportunities. With that in mind, here are three things you should know about how divorce may affect you financially.
First, there’s your Social Security benefit. You should know that you may be eligible to collect retirement benefits from your ex-spouse’s work record. Your marriage must have lasted at least 10 consecutive years, you must currently be single, and your ex-spouse must be at least age 62 and eligible for benefits. If these requirements are met, you might be entitled to up to half of your ex-spouse’s primary insurance amount once you reach your full retirement age, as long as your ex-spouse’s benefit is larger than your own. Once you’ve remarried, though, the ex-spouse benefits go away. And you should know that while a divorce court can often divide your pension or retirement assets, it cannot reduce your Social Security benefits that you have coming to you.
Next, you should be ready to deal with your retirement accounts. Because 401(k)s and IRAs are often the largest non-housing assets a couple owns, they can be hotly contested items in a divorce. These accounts can be split up to help potentially equalize assets or used in lieu of alimony or child support. This can require a lot of negotiation and paperwork, so you need to be careful here. Your pension can also be split in a divorce. And remember to change your beneficiary designations after the ERISA-controlled accounts are split, because they’ll likely default to the current beneficiary designation—and you may not want that.
The third issue has to do with housing. Home equity is sometimes the largest asset for retiring couples in the U.S., and it can be easily overlooked because it’s not always viewed as a retirement asset. So what can you do? In some cases, one spouse keeps the home and buys out the other spouse for their half. But this can lead to cash flow problems in retirement if you have to take on a new mortgage to do it. Another option might be to sell the home and split the proceeds—or you might use a reverse mortgage as a way to potentially cash out about half of the home’s value to pay off the other spouse.
So as you can see, there’s a lot to consider. Divorce at any age can be difficult. But if you’re in your 50s or 60s, it can also be a lot more complicated and cost a lot more. You might have more assets, more debt, more retirement accounts, or more estate planning issues.
That’s why proper planning is essential. It’s also why having a team of professionals to guide you along the way may be the best move you can make. Give us a call; we’re here to help!
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
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Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.
IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.
Rick Plum is a registered representative of, and offers securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and an affiliate of Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.